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FATCA Guidance Issued for Foreign Financial Institutions

The IRS has issued more guidance in preparation
for the implementation of the Foreign Account Tax Compliance
Act (FATCA) reporting and withholding requirements (Notice
2013-69). The guidance applies to foreign financial
institutions (FFIs) entering into an FFI agreement with the
IRS under Sec. 1471 or to FFIs or branches of FFIs treated as
reporting financial institutions under an applicable Model 2
intergovernmental agreement (IGA).

Under FATCA, U.S.
withholding agents are required to withhold tax on certain
payments to FFIs that do not agree to report certain
information to the IRS regarding their U.S. accounts and on
certain payments to certain nonfinancial foreign entities
(NFFEs) that do not provide information on their substantial
U.S. owners to withholding agents.

Final regulations
issued in January (T.D. 9610) integrated two types of model
intergovernmental agreements (IGAs) into their reporting
requirements: reciprocal agreements and nonreciprocal
agreements, which are called Model 1 IGAs and Model 2 IGAs,
respectively. Generally, Model 2 agreements require FFIs to
report required information directly to the IRS instead of to
the FFI’s government.

The notice provides a description
of the general responsibilities of participating FFIs and FFIs
and their branches treated as reporting financial institutions
under an applicable Model 2 IGA. It also describes some
intended updates to the regulations under chapters 4 and 61
and related forms.

The notice says that regulations
will be issued providing that a payer other than a U.S. payer
or U.S. middleman (i.e., a non-U.S. payer) that is a
participating FFI or treated as a reporting FFI under a Model
1 IGA will satisfy its reporting obligations with respect to a
U.S. payee (or presumed U.S. payee) that is a nonexempt
recipient if that FFI reports the account holder pursuant to
the FFI agreement or the applicable Model 1 IGA.

Regulations will also be issued that clarify how the Form
1099 reporting requirements apply when an FFI must withhold on
a payment and that backup withholding under Sec. 3406 will not
apply in addition to withholding under FATCA. Existing
regulations will be modified to change the requirement for
reporting foreign reportable amounts for nonparticipating FFIs
in 2015 and 2016 so that only foreign reportable amounts paid
for a financial account that the FFI maintains for a
nonparticipating FFI must be reported.

Finally,
regulations will be issued that change the definition of what
is a passive NFFE and the definition of U.S. person to include
a foreign insurance company that elects under Sec. 953(d) to
be treated as a domestic corporation.

The notice also
describes the procedures for FFIs to register for
participating FFI or reporting Model 2 FFI status and contains
a draft Model 2 agreement, which the IRS said it would
finalize by Dec. 31.

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The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.